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i have the problem attached with the work but not understanding how this problem is solved? Could you break it down easier so i can comprehend how to calculate number to get the answerIf you want the formulas and any calculations, select the corresponding cell and press F2(Function Key on key board),

 

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Question:

 

Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares

 

outstanding and a target capital structure consisting of 30% debt. Vandell's debt interest rate is 8%.

 

assume that the risk free rate of interest is 5% and that the market premium is 6%. Both Vandell and

 

Hastings face a 40% tax rate.

 

Vandell's free cash flow (FCFo) is $2million per year and is expected to grow at a constant rate of 5% a

 

year; its beta is 1.4. What is the value of Vandell's operations? If Vandell has $10.82 million in debt, what

 

is the current value of Vandell's stock? (hint: use the corporate valuation model)

 

Solution; Computation of the Value of Operations and Current value of Stock

 

Calculate the Present Value of all future free cash flow associated with operations

 

Free cash flow next year =2.0*1.05

 

2.1

 

Value of operations =

 

2.1/ (WACC-5%)

 

Now first calculate the cost of equity

 

cost of Equity =

 

risk free rate +beta*risk premium

 

cost of Equity =

 

5%+1.4*6%

 

cost of Equity =

 

13.40%

 

Let value of equity is Vs then we have

 

Value of operations = Vs+$10.82 million

 

The weight of debt =10.82/ Value of operations

 

Weight of equity =

 

(Vops-10.82)/ Value of operations

 

WACC=10.82/ Value of operations *8% *(1-40%) + (Value of operations -10.82)/ Value of operations *13.4%

 

WACC =

 

13.4%-8.6%*10.82/ Value of operations ------2

 

Substituting the value of WACC in equation 1 we get,

 

Value of operations =

 

2.1/ (13.4%-8.6%*10.82/ Value of operations -5%)

 

Solving we get

 

8.4%* Value of operations -0.93052=2.1

 

Value of operations =

 

3.03052

 

$36.08

 

Now value of equity V

 

$25.26 million

 

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Solution details:

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May 23, 2022

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